Monday, December 22, 2008

Nepal to earn Rs 250 billion in royalty by 10,000 MW

December 22, 2008

Dr Shankar SharmaFormer ChairNational Planning Commission

Dear Shankarjee

You would recall that we were together in TU, Kirtipur doing our respective Master’s degrees – you in statistics department and myself in the humble commerce department. Although we belonged to different faculties we used to be in good terms. I have been watching your meteoric rise in the career path with immense pleasure. I am very happy for you and also hope that you will go on to conquer several other peaks in your career path. My sincere best wishes to you.

I am sending this email to you to draw your attention to your captioned statement made in the presence of Prime Minister Dahal last Friday during the inauguration of 6th AGM of CNI. I disagree with the number you quoted during your presentation. You said that just from the royalty of 10,000 MW Nepal can earn Rs 250 billion (you said in Nepali 2 saya 50 arba) even under existing law of Nepal. I hope I did hear you correctly. If what you meant was Rs 250 million then you don’t need to read this email further; just ignore it.

I have come to hate people reeling of these huge numbers simply because it’s incorrect. During the power summit of 2006 TN Thakur of PTC India did his best to mislead Nepali populace by announcing that Nepal can earn IC Rs 10,000 crore (NRs 160 billion) by exporting 10,000 MW electricity. I published an article refuting his statement in Kantipur on 13th Kartik last year. Realizing that he wouldn’t be reading an article in the vernacular daily, I got another article published on the same vein in the Kathmandu Post on 25th Paush last year. Then some half-wit went overboard and said Nepal will earn Rs 25,000 (250 billion) crore by exporting 10,000 MW in a program in Patna couple of months back. I earnestly hope that you are not inspired by these numbers.

Because, under the extant Electricity Act, 1992, capacity royalty is Rs 100 per kW and energy royalty is 2%, at the rate of which Nepal will earn a total royalty of Rs 4.9 billion only if the hydropower projects are able to achieve plant factor of 50% and sold at US 6 ¢. This number is lower by a magnitude compared to the one you quoted. I take it that you are aware that NEA is able to achieve only 33% plant factor and in which case the royalty earning will go down to Rs 3.6 billion only.

Under the Electricity Bill the proposed capacity royalty is Rs 400 per kW and energy royalty is 7.5%, at the rate of which Nepal will earn a total royalty of Rs 18.78 billion at 50% plant factor. Even at the proposed higher rate for royalties Nepal’s earning from royalty will be very far from what you have quoted.

Even if Nepal was to levy 100% of the electricity sales revenue as royalty, Nepal will receive only Rs 197 billion – still not quite Rs 250 billion. The electricity will have to be sold at US 7.6 ¢ and cent percent of the sales proceed will have to be charged as royalty to achieve royalty revenue of the level you mentioned. Nobody will disagree that this is a ridiculous proposition and Nepal will never be able to levy royalty at this level. In other words the royalty rate will have to be Rs 8.65 per kWh (unit) in order for Nepal to earn as royalty Rs 250 billion. Under present market condition this is an impossibility.

Sometime back Professor Dr Ram Manohar Shrestha also came up with similar astounding number about potential royalty revenue and I did point out his error (over estimation), which is published in my blog (http://ratnasansar.blogspot.com/), in order to deconstruct the myth that is being perpetuated. I thought you did have an opportunity to peruse it.

Therefore, I hope that you will refrain from repeating the above so that general public in Nepal are not misled.